Monthly Archives: August 2013

On August 20th we were decompressing from a trip to San Francisco where your faithful servant spoke at the 2013 ALI-CLE Land Use Institute, so unsurprisingly, we missed an important if obscure news item that we must share with our readers now. Better late than never. We are indebted to our fellow blogger, Robert Thomas (www.inversecondemnation.com) for providing us with a link to this story (Carolyn Said, Pricey Homes in Richmond Eminent Domain Plan, San Francisco Chronicle, August 20th, 2013, www.sfgate.com.

The Richmond, California shtick about the proposed condemnation of “underwater” mortgages that has been crowding the papers and the Internet recently, has depicted Richmond as a down-at-the-heels community whose damn-near destitute population is in dire need of relief from high mortgages left over from when the California housing bubble popped. Some of it may be true, but we now learn that as to others, it is bullshit. It now turns out that some of the homes in question sold for over a million. The range of the houses whose owners are slated to be the beneficiaries of this plan range from $98,000 to $1,120,000. Check this out:

We believe that usually one picture is worth a thousand words, so we won’t belabor the point. But we must emphasize that if the information on sf gate.com is to be believed, in this case the city is trying to pick up a mortgage with a nominal balance of $888,361, with an estimated value of $666,461, for a mere $510,727, which would give it a profit of $155,734. Of course, as the readers know from perusing the “Lowball Watch” department in this blog, such differences between condemnor’s estimates and the court awards, are common. But here the up front “estimated” value of the mortgage on this house is six figures higher than the city’s offer. Dealing with problems like that is how appraisers make a living, but seeing an offer that is $155,734 lower than the conceded value is an eyebrow-raiser, isn’t it?

In the words of the sf.com story:

“The data show the targeted loan balances are fairly high. A total of 121 loans are for over $500,000, with 43 above $600,000. The average loan balance is $387,800; the median is $378,920.

“Richmond’s offers, which are closer to what it considers current market value, include 30 for more than $400,000 and 108 for above $300,000. The average offer is $202,678; the median is $179,900.”

Whatever that may be, poor folks in a destitute city this ain’t. And it does seem offensive to your faithful servant that government aid should favor folks whose homes are way above the median prices, while loudly proclaiming that the city and its private allies looking to fill their pockets are the poor folks in need of government help. If those folks bought a million-dollar home, they should have to deal with the consequences, whether their own improvidence or economic conditions in general, by themselves, just as they acted by themselves when they decided to buy a million-dollar home.

Remember the California bullet train whose construction was to start in 2012? “Now it appears that serious construction may not begin this year, and could be delayed to 2014.”

“Factors contributing to the sluggish start include delays in getting a construction company under contract and lack of key federal permits. “That includes permits from the Corps of Engineers allowing the railroad to cross rivers and waterways between Merced and Fresno.” Ralph Vartabedian, Extended Delays for Bullet Train, L.A. Times, August 12, 2013, at p. AA1.

As we have been trying to convey to our readers, Detroit is far from being the only American city to suffer the cataclysmic slide downward that has been filling the news, particularly since the erstwhile “Motor City” filed for bankruptcy. The fact is that a number of American cities are in similar straits. The only difference is that the others have not been as dunderheaded as Detroit, and did not get the publicity. We won’t go through that whole megillah again, but we do want to call your attention to Gary, Indiana — another American urban basket case. A city “battered by decades of industry layoffs and racial friction that caused waves of suburban flight, shrinking city coffers drastically.”

The New York Times of August 15, 2013, (at p. A12) brings us the sad news of Gary. Steven Yaccino, A Chance to Own a Home For $1 in a City on the Ropes. From a steel town with a population of, 180,000 in the 1960s it’s down to 80,000 people, with 10,000 abandoned houses. A third of all city homes are unoccupied. In the past, Gary tried such crackpot redevelopment schemes as building an independent league baseball stadium, hosting the Miss USA beauty pageant, and proposing a Michael Jackson museum, but for some strange reason, none have worked out and that museum never got off the ground.

So the latest Gary shtick is that if you have a threshold income of $35,250 the city will sell you a house for $1 — that’s right, one buck. But the problem with that, point out critics, is that the available houses are in need of repair, and the folks at that income level don’t have the money to bring them up to code, which is required. Catch-22 all over again. So the city plans to demolish one-third of those vacant houses, which will still leave it with thousands of derelict structures.

It just dawned on us — sometimes we write before our morning coffee — that the Daily Mail is a British newspaper. So how come we get this news from the Brits, but not from the good ol’ American press? Just wondering.

There are moments when consuming our morning fix of Americano at Starbucks can be dangerous. No,, there is nothing wrong with the coffee; it’s great. It’s just that as we peruse our morning paper we sometimes come across news items that tend to induce a coughing fit, and here is one. See Diana Marcum, Stockton’s “Not Bell,” L.A. Times, Aug. 6, 2013, at p. AA1.

The State of California has just completed an audit of the finances of the city of Stockton (which, as you may recall, is one of three California cities that have filed for bankruptcy), and predictably, discovered some, er, irregularities. No, as far as these folks can tell, no one has been caught with his hand in a cookie jar — no sir. The defense offered by Stockton is more along the lines of: Oh, that old stuff. We weren’t bad; we were just incompetent. No big deal. You aren’t going to make a fuss over the fact — for example — that we stashed some $1.3 million in redevelopment funds, even though there has been no redevelopment in California for a while, or that we were so incompetent that we didn’t fill out some federal forms properly and thus missed out on $8.6 million in federal money. Coulda happened to anybody.

“In the 1960s, sociologist Herbert Gans identified a growing chasm between family-oriented suburbanites and people who favored city life—“the rich, the poor, the non-white as well as the unmarried and childless middle class.” Families abandoned cities for the suburbs, driven away by policies that failed to keep streets safe, allowed decent schools to decline, and made living spaces unaffordable. Even the partial rebirth of American cities since then hasn’t been enough to lure families back. The much-ballyhooed and self-celebrating “creative class”—a demographic group that includes not only single professionals but also well-heeled childless couples, empty nesters, and college students—occupies much of the urban space once filled by families. Increasingly, our great American cities, from New York and Chicago to Los Angeles and Seattle, are evolving into playgrounds for the rich, traps for the poor, and way stations for the ambitious young en route eventually to less congested places. The middle-class family has been pushed to the margins, breaking dramatically with urban history. The development raises at least two important questions: Are cities without children sustainable? And are they desirable?” Joel Kotkin and Ali Mondarres, The Childless City, City Journal, Summer 2013 (Vol. 23, No. 3).

The authors conclude:

“Ultimately, everything boils down to what purpose a city should serve. History has shown that rapid declines in childbearing—whether in ancient Rome, seventeenth-century Venice, or modern-day Tokyo—correlate with an erosion of cultural and economic vitality. The post-family city appeals only to a certain segment of the population, one that, however affluent, cannot ensure a prosperous future on its own. If cities want to nurture the next generation of urbanites and keep more of their younger adults, they will have to find a way to welcome back families, which have sustained cities for millennia and given the urban experience much of its humanity.”

Follow up. You may find a dramatic confirmation of Mr. Kotkin’s views in the New York Times of August 14, 2013, Suzanne Daley and Nicholas Kuller, Germany Fights Population Drop, at p. A1, reporting dramatic changes taking place in Germany because of its population decline:

“In its most recent census, Germany discovered it had lost 1.5 million inhabitants. By2060, experts say, the country could shrink by an additional 19 percent to about 66 million.”

“Demographers say a similar future awaits other European countries, and the issue grows more more pressing every day as Europe’s seemingly endless economic troubles accelerate the decline.”

So it looks like the Fatherland has more Lebensraum than it can use. Interesting.

If you haven’t done so already, do read the op-ed by Richard J. Riordan (former Mayor of L.A.) and Tim Rutten (former journalist with the L.A. Times), A Plan to Avert the Pension Crisis, L.A. Times, Aug. 5, 2013, at p. A17) What these two gents do there is two-fold: first they outline just how dire are the dire straits that California is in — “California’s giant state pension fund, the world’s sixth largest, continues to assume it will earn 7.75 percent on its investments, even though its actual returns have been less than half that for a decade.” Excuse us, folks, but your faithful servant is only a barefoot city lawyer who is frequently awed by the intellectual puissance of his betters, but isn’t that what one could justifiably call “cooking the books”?

The root of our imminent fiscal calamity is — surprise, surprise – “unaffordable public employee pension liabilities.” It’s not so because we say so; it’s because they concede it. “In California, . . . more than 20,000 state and local retirees receive annual pensions of more than $100,000 . . .” So if you claim any acquaintanceship with basic arithmetic, to say nothing of the first law of thermodynamics (what you don’t put in, you can’t take out) you might think that the solution is to reduce the absurdly high and plainly unsustainable pension burdens. Yes? Not exactly. According to Riordan and Rutten — “we must avoid demonizing public employees and their unions” and instead let their leaders be born again and ”embrace this process.”

And what process might that be? We will let you see that for yourself. Suffice it to say that it involves a new species of bonds, some fast shuffling of state and federal money and, of course, Uncle Sam’s deep pockets. Click here. Uncle would insure this whole shebang by guaranteeing those new bonds that would provide the funds needed to keep those exorbitant pensions afloat, by a new kind of federal insurance, and the states would — what else? — sell bonds to raise money for premiums. But wait! Wasn’t it the states’ sales of bonded debt what got them into trouble to begin with? Like we said, you’ll have to read this for yourself, but the bottom line of this proposal would be a rescue of the profligate state and local pension spending at — ta, da! — “no cost to Washington.” Free money, folks! Come and get it.

We always thought that Dick Reardon is a pretty smart dude (Tim Rutten, a long-time stalwart at the L.A. Times that has never seen a union proposal it didn’t like) not so much. But when it comes to municipal high finance, we guess that nobody is immune to the siren call of free money. So rots of ruck, Dick (and Tim). May the Force be with you, even though for it to work best it requires the ministrations of Obi Wan Kenobi who, so far, has not expressed an opinion on how to get and enjoy a free lunch.

Full disclosure. Long time ago, in a galaxy far away, you faithful servant worked with inter alia Dick Reardon on a land-use case that, were it not for the large stakes, and the gravitas of the personages involved in it, would be way up there in the annals of legal humor. See Robert I. McMurry and Gideon Kanner, Shootout at Warner Ridge, Los Angeles Lawyer, January 1995, at p. 24. It was the kind of $100 million case in which the City of Los Angeles was held liable for a regulatory taking, although once Los Angeles recovered from the shock of that judicial ruling, it was born again, and everything settled promptly. It was described by the L.A. Lawyer editors thus: ”When the dust settled on the planning process for the Warner Ridge Ranch, no one was left standing.” A perfect ending for a California land-use case, particularly because the obnoxious city councilwoman who presided over that calamity was denied reelection in the next election, and the lawyers got paid.

“Average home prices across 20 cities have now reached their spring 2004 level. For the first time, two cities — Denver and Dallas — surpassed the peaks they reached before the 2008 financial crisis.

* * * *

“Las Vegas and Phoenix, two cities where prices fell hard during the bust, have come roaring back, in large part because investors have scooped up many foreclosed properties to flip or rent out. Year-over-year prices rose 23.3% in Las Vegas and 20.6% in Phoenix. . . . Prices rose 19.2% in the Los Angeles region over the year and 17.3% in the San Diego area.”

Andrew Khoury, Home Prices Still Rising at a Torrid Pace, L.A. Times, July 31, 2013, at p. B1.

The problem is that this is largely driven by the artificially low interest rates that are beginning to inch up and are not long for this world, and by the fact that lots of folks out there have lots of cash which they can’t profitably invest elsewhere. Income from bonds in the crapper, the stock market is “bubbling” too, so investing in real estate seems like a good idea. But most people — especially at the entry housing level, who don’t have an extra half a mil and up under their mattress – don’t have that kind of money and they are increasingly being excluded from the housing market. Our concern is that interest rates will go up and ordinary people who have to buy homes on time will be further deterred from buying homes at these fancy prices (the median is now up there at over $385,000). Do we hear the sound of another bubble getting ready to pop? You tell us.

We think that this trend is not going to end well — and the end won’t be pretty. But as long as Uncle Ben (Bernanke, that is) and Uncle Sam are keeping interest rates down, down, down, this madness will continue. But for how long?

Richmond, California, has announced that it means to go ahead with the harebrained scheme of using eminent domain to acquire mortgages on “underwater” homes at bargain prices, thereby screwing the lenders, and renegotiating loan balances with the owner/occupants of those homes. The idea is that the homeowners who signed contracts to make higher monthly payments would now be able to pay lower ones, and continue in lawful occupancy of those homes rather than losing them by foreclosure. That is to say that the taking of the “underwater” mortgage and converting it into one providing for lowered loan balances negotiated after the taking, would allow the owners/borrowers to reap a windfall — i.e., their monthly payments would now be based on the new, lowered loan balance, with their [former] lender taking what these folks call a “haircut” — i.e., a screwing.

For the last few days, the internet has been full of news items dealing with that proposed scheme. But the bad news is that most people writing on that subject talk about the right to take, and don’t seem to have a clue that the would-be takers of these mortgages — actually deeds of trust; we don’t use mortgages in California — will have to pay just compensation, i.e., fair market value, not some bargain basement figure pulled out of thin air. And by California constitution and statute, you have to keep two things in mind. First, the “just compensation” called for the state constitution has to be “first” paid — in full, and up front, that is — before any taking can occur (Cal.Const. Art. I, Sec. 19). Second, by state statute, the condemnor has to pay “fair market value” which is further defined by statute as “the highest price” (not a bargain price), that a willing but unpressured buyer would voluntarily pay to and be accepted by a willing but unpressured seller on the date of value, giving due consideration to the property’s potential uses, including its highest and best (which is to say, its most profitable) use. See Cal. Code Civ. Proc. Sec. 1263.320.

We note that if this harebrained scheme comes a’cropper, as it likely will, for one reason or another, it won’t be the first time Richmond got its greedy fingers burned playing with eminent domain abuse; see Richmond Elks Hall v. Richmond Redevelopment Agency, 561 F.2d 1327 (9th Cir. 1977), one of the leading cases in which the court took a dim view of a city trying to use its power of imminent eminent domain to blight private property, and then take it at its depressed value. Didn’t work out.

Are those folks trying it again? We don’t know for sure. But it seems clear that they intend to acquire “underwater” deeds of trust at below-market prices. So says the New York Times. Will it fly? Will the courts go for this sort of scam? We’ll have to wait and see, but we believe that not even California courts will stand still for that. Why not? Because under our law, if the condemnor tries to lowball too much, and makes an unreasonable pre-trial offer, it may have to pay the condemnees’ attorneys’ and appraiser’s fees, plus other litigation expenses, on top of the “just compensation” required by the constitutions. And, of course, any diminution in value brought about by the the market’s reaction to the imminence of the condemnation, cannot be considered in determining fair market value. The property has to be valued as if unaffected by the condemnor’s plans or by any preliminary steps taken toward the condemnation. Cal. Code Civ. Proc. Sec. 1263.330.

Then there is the little matter of partial takings. No, not parts of mortgages, but rather the fact that a lot of the “underwater” deeds of trust (or mortgages) have been bundled as security for bonds, and we have trouble visualizing how a condemnor in one of these cases would (or could) pluck a specific ”underwater” deed of trust from such a “bundle” and value it alone, without simultaneously lowering the value of the deeds of trust remaining in the “bundle” that forms security for the bond. If attempted, that would likely call for severance damages payable to the bond holders for the diminution in the value of what remains of their bond(s) after the “plucking” (the partial taking of the bundle).

Thinking about some of these problems gives us a headache, and we are grateful that we are retired and can now view all that as a spectator sport.

On the other hand, if this stuff proceeds as proposed, there will be lots of work for condemnation lawyers, or worse, for big-shot Wall Street lawyers who may not really know much eminent domain law, but sure know how to litigate and swamp their opponents with paper. And they are amply financed to put up one hell of a fight.

We can’t wait.

Update. For the Los Angeles Times take on the status of the “underwater mortgage” caper, see Alejandro Lazo, Proposals to Seize Loans Gain Traction, Aug. 7, 2013, at p. B1. In the meantime “rising [home] prices have feed many homeowners from negative equity positions” so the pool of potential customers (and victims) is shrinking.